Business risk: Contractual breaches

Business risk may hit in unexpected ways during an economic downturn. In this TV Doug Hall discusses a case where a contractual breach caused major loss.

A business risk case study

A commercial contract between two parties has to be mutually advantageous, so I acted for a client in the Czech Republic a couple of years ago and they supply components which go into engines for ships, very large components. In 2007 ship building in the far east was booming and err, their Korean customer wanted to make sure they can sufficient of these components, they wanted to secure suppliers, so they’d make a contract with my Czech clients. In 2008 the world changes, suddenly they literally stop building ships, so what was previously mutually advantageous suddenly is onerous for the Korean party to that contract, they don’t want those components anymore so they breach, they say ‘We don’t care about the contract, we’re not going to buy your components anymore’. So firstly there’s a question on liability, where they entitled to breach. The second question is what has the Czech manufacturer lost by reason of not being able to supply those components. So the question is how many units they will have sold and what profit they would have made per unit and both of those variables sound very simple but if you imagine how you can make a profit or how you’d measure profit in a very large manufacturing business there’s all kinds of detail in how you do that. So that’s broadly a kind of situation where a breach causes a loss. So in that case err it was tens of millions of dollars, you could have exactly the same situation where it’s £10,000, err one party to a contract decides they don’t want to continue with it, the other party says ‘Well if you had continued I would have made some money and I want to be compensated for the money that I’ve lost as a result of your breach’.

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Business risk: Contractual breaches

Business risk may hit in unexpected ways during an economic downturn. In this TV Doug Hall discusses a case where a contractual breach caused major loss.

A business risk case study

A commercial contract between two parties has to be mutually advantageous, so I acted for a client in the Czech Republic a couple of years ago and they supply components which go into engines for ships, very large components. In 2007 ship building in the far east was booming and err, their Korean customer wanted to make sure they can sufficient of these components, they wanted to secure suppliers, so they’d make a contract with my Czech clients. In 2008 the world changes, suddenly they literally stop building ships, so what was previously mutually advantageous suddenly is onerous for the Korean party to that contract, they don’t want those components anymore so they breach, they say ‘We don’t care about the contract, we’re not going to buy your components anymore’. So firstly there’s a question on liability, where they entitled to breach. The second question is what has the Czech manufacturer lost by reason of not being able to supply those components. So the question is how many units they will have sold and what profit they would have made per unit and both of those variables sound very simple but if you imagine how you can make a profit or how you’d measure profit in a very large manufacturing business there’s all kinds of detail in how you do that. So that’s broadly a kind of situation where a breach causes a loss. So in that case err it was tens of millions of dollars, you could have exactly the same situation where it’s £10,000, err one party to a contract decides they don’t want to continue with it, the other party says ‘Well if you had continued I would have made some money and I want to be compensated for the money that I’ve lost as a result of your breach’.

Browse Inside Finance for more fantastic videos on business risk, and follow us on Twitter @InsideFinanceTV to have your say on the big business issues.

Strategy development for investment was what Envestors was created to teach. Founding Director Oliver Woolley discusses the importance of preparing for investment in this TV show.

Investment strategy development

One of the reasons we set up Envestors is that we thought there was a bit of education needed on both the investor and entrepreneur side. So we provide training for investors. We produce a guide to how to invest as a business angel and we do a seminars for investors. So our idea is to educate both the investor and the entrepreneur and try and get them close enough so that we can get good deals done.
So we find that a lot of companies aren't particularly well prepared so we run an investment readiness briefing on a Tuesday morning every two weeks, which is free. It is essentially a two hour seminar about the practicalities and realities and the obligations of raising external equity finance. We find that at the end of that, that the company has though a lot about their business plan but they haven't though enough about it from an investment perspective. So we will then work with a company to make sure that there is a full and detailed investment proposal.

Business strategy models have to adaptable to future disruptions and developments. In this TV show Keith Coats of TomorrowToday discusses strategic thinking for leaders.

Business strategy models in an unpredictable world

Leaders have to be future-focused. Levi right now have a great slogan, which says ‘the future has left, so go forth’. Jim Data is a retired futurist and he articulated that past thinking amongst futurists was something like this … I might have some of the percentages slightly wrong but the rough ratios is 80% of our tomorrows would be built on what futurists call continuations, so if you want to understand tomorrow, look at the DNA of today, 80%. 15% would be cycles – economic, political social cycles – and 5% would be novelties. Now, in the futurist language a novelty is the curve ball, the unexpected, the 9/11, the thing that very few people could foresee. I’ll preface that with past thinking. Current thinking amongst futurists has inverted that table, turned it on its head. They are telling us that up to 80% of our tomorrow is what they call novelty, we simply do not know. Now, even if they’re half correct I wouldn’t go to war over those percentages, it’s the trend here we’re looking at, that the bulk of our tomorrows is going to be a surprise, going to be the unexpected, the unpredictable. The question then becomes how do you build continuity in that? What does the organisation that learns how to build planes in the air, as it were, look like in that context? For one thing it renders redundant strategic planning, you cannot plan your way into that kind of uncertainty. We need companies today who understand the emphasis needs to be on strategic thinking and at all levels of the organisation, this is a leadership agenda.

Inside Finance is very interested in business strategy models and the future business world. Browse our video player for related content.

Assessing business risk appetite

Business risk can come from many unknown variables. When working with an investment manager people should be clear about how much risk they are prepared to take, as Michael Pagliari explains in this TV show.

Investment & business risk

I think that you know individuals sometimes tend to give misleading answers when asked about the amount of risk that they want to take. So for example a typical response that you get from an entrepreneur is ‘oh, I don’t really want too much risk but you know I’d like to make 10% returns’. Now in the current sort of environment that we exist, where interest rates are at zero, 10% is a very ambitious rate of return, so the statement is actually pretty incoherent. So at that point I think you need to dig deeper and find out exactly what the client needs as a minimum requirement and make sure that it is coherent with his underlying thought process. They understand risk very well in their own business, in the context of managing financial assets my experience has been that that knowledge is of the same type of thought process does not necessarily transfer itself well to their financial assets. And that can mean, that can mean that either they take on too much risk in their financial assets or they take on too little. Ideally, I actually think that it takes about a couple of years until you really understand a client’s risk profile and as you get to know him you make some adjustments. So my personal suggestion or my personal methodology is to start with a relatively conservative risk profile until I feel that I really understand and know the client better. Investment does involve risk. The value of investments can go down as well as up. This video contains information believed to be reliable but no guarantee is given. See Video for full disclaimer.

Attitude to risk relates to life cycles

Attitude to risk may depend on the age of the client or the business. Younger people lean more towards risk, as Michael Pagliari explains in this TV show.

The young person's attitude to risk

I think that goes back to sort of life cycle questions. As clients are younger and are looking to build assets they may well have a higher disposition towards risk and that might lead them towards more growth-type portfolios. As clients advance through that life cycle and perhaps sell a business or begin to retire then it’s really a question about draw-downs and inheritance tax planning and so on, and portfolios tend to de-risk to some extent. So as you grow through that life cycle portfolios do tend to sort of de-risk over time.

Legal sector had a change in the types of case brought to them when the economic downturn disrupted businesses across the globe. In this TV show Doug Hall discusses the increase in breach of contract cases.

Legal Sector: The impact of the recession on commercial disputes

Very simply, it may be a cliché but the recession meant that pretty much overnight in some sectors the world changed and the example of the ship building is a prime example of that, in 2007 manufacturers in the far east can’t make enough ships, in 2008 suddenly people operating ships don’t want to buy them anymore, so suddenly the world changes overnight. That creates an impetus for all kinds of breaches to take place, because the world has changed simply. So what we saw after the recession or after the recession started was a big increase in the number of breaches of contract cases, we’ve seen a higher incidence of shareholder disputes and that’s simply there may be longstanding issues between shareholders but when there’s strife, when you’re operating in a difficult environment, maybe those tensions are amplified and they fall out, the same with partnerships, including professional partnerships. We’ve seen actions against professionals which for example arise out of insolvency, so a company goes down because times are tough, and in the lead up to the company going down there’s been issues with what advisors, professionals, auditors have done, there may have been issues with what the directors had done, they were doing their best to save the company but maybe they end up committing a breach of fiduciary duty or selling assets at under value, or getting confused about what’s their money and what’s the companies.
Keep browsing the fantastic TV shows on Inside Finance to hear more about how the legal sector deal with business disputes. Look out for more form Doug Hall.

Attitude to risk: Successful IT investors are risk averse

The attitude to risk form those in high risk environments is to exercise caution as Michael Pagliari explains in this TV show.

A cautious attitude to risk

I actually have a few clients that have done exactly that and I’ve actually found that there I’m on the more cautious of our clients. So their business risk, if you like, is very high and they’re well aware of it and the last thing they want to do is suffer losses under their financial asset portfolio, so I’ve tended to find those people the most cautious of all the clients that I manage money for. Investment does involve risk. The value of investments can go down as well as up. This video contains information believed to be reliable but no guarantee is given. See Video for full disclaimer.

Keep visiting Inside Finance for more great videos on attitudes to risk and similar subjects.

Business assets valuations look to the future

Business assets valuations are needed for commercial and tax purposes. It is a complex process. In this TV show John Rugman explains the art & science of valuations.

Business assets valuations are an art

Valuations need to be done well because the value of any business or asset is really dependent on the future performance of that business. So it’s less about the past and more about the future and that’s quite judgemental, it’s not a matter of fact, it’s a matter of opinion and analysis. So valuations are as much an art as they are a science and it’s important to get that judgement right. To do a proper valuation we really need to understand about the prospects for a business, so we really need to understand what the prognosis is, what the future performance of that business might be and the sorts of risks that might affect that performance. All valuations are very different, doing a valuation for tax purposes is a very different exercise to doing a valuation for commercial purposes. We use a variety of different approaches and techniques to make sure that any conclusion we reach is one which we’re comfortable with.
Keep browsing videos on Inside Finance TV for more expert insight into business assets valuations, risks to the assets, and legislations that must be followed.

Informed financial planning advisors under the spotlight

Informed financial planning advisors pass on their wisdom to clients. If a company fails they will naturally look at back at this advice. In this TV show Doug Hall discuses throwing the spotlight on professional advice.

Informed financial planning advisors

For example auditors, we are dealing with a number of cases, where a company has failed, and if the company had not failed there wouldn’t be an issue. But in the company going into administration for example, major creditors had lost and they may say that they have relied for example on audited accounts to make decisions, to lend money or to support the company and in the cold light of day the company having failed, that’s an example where you may go back and look at what the auditor said in earlier years. So we have situations arising from insolvent companies where the spotlight is thrown onto a whole range of professional advice that they were given before the company failed. Which never would have come under that spotlight if the company hadn’t gone into administration for example. It's not an area that we get involved in but valuers have seen a big increase in the number of actions against them very simple because the banks relied on valuations of properties for example, and then when the company has gone into administration and the bank has lost out, they then go back and look again at the professional opinions that they relied upon, in making their original lending decisions.

Inside Finance will continue to produce great videos on informed financial planning advisors and similar subjects.

The attitude to risk will change depending on how much there is to lose. As Charles Gowlland explains in this TV show a Smith and Williamson survey found that threats to wealth are a common concern.

Fearful attitude to risk

There were a number of things, I think when we looked at the results of the survey we weren’t completely shocked or surprised by anything that came in and to a certain extent that gave us a lot of reassurance that we already had a good sense of what they were thinking and what they were worried about. So from that point of view there were no radical shocks. But I still think there were a couple of aspects that came out of it that were interesting to us. One of the areas was the concept of threats to wealth, I mean this is obviously one of the big long term issues for families. They’ve made their money or they’ve inherited it, how do they ensure that that money, that wealth persists through the generation and there were four main categories of threats to wealth as far as we could see it, and what was interesting I think about the response was that they were broadly similar in that people were equally worried about each of those and there wasn’t any particular split by, if I can put it like this, by how old the money was. So in other words these fears were common to all types of clients and those categories were legislative change that might be adverse league or tax, the financial mismanagement, the children squandering the money or volatility in financial markets. And included in those was inflation, and I think certainly for some families with a long and bitter history, inflation for them was a big worry.

Keep an eye on Inside Finance for more great TV shows on attitude to risk and other related subjects.

Business assets must be allocated carefully

Business assets that are allocated correctly can potentially contribute 90% return to a portfolio, as Michael Pagliari discusses in this TV show.

Spending time allocating business assets

One of my pet hates is seeing, you know, proposals sent out to clients that are very deterministic in nature, in other words coming up with a particular solution to a client’s investment problems. I think, you know, it’s much more complex than that and really the whole question about risk and asset allocation is absolutely key, and I think there have been plenty of studies which have been done which show that asset allocation, good asset allocation, contributes about 90% of the total return to a portfolio. So it’s really, really important that a lot of time is spent at the beginning and during the course of a relationship focusing on getting that asset allocation as good as you possibly can.